You Say you Want a Revolution? Well, You Know… No

The ever popular, industry-leading blog The D&O Diary recently published a guest post arguing that the "right way" for the D&O insurance industry to bring the escalating cost of insurance under control is by cutting back the scope of coverage provided by D&O insurance policies. In this guest post for the D&O Notebook, my colleague and D&O coverage expert Gil Isidro vigorously disagrees . . . including in verse.

Like Kevin LaCroix, I had the "viscerally-negative reaction" that John McCarrick and Paul Schiavone predicted their recent guest post on the D&O Diary would engender. And like Kevin, it took some time to calibrate the tone of my response, as I also have great respect for both John and Paul. While I haven't worked with John, he is widely regarded as one of the leading management liability coverage attorneys in the industry. And though I arrived at AIG Financial Lines after Paul had left, I have heard many tales of his leadership and I hold him in very high regard.

Kevin and I are not alone in our reaction. Just last week, Kevin published a reply penned by Paul Ferrillo of Greenberg Traurig. I certainly agree with Paul Ferrillo's argument that the current breadth of policy terms and conditions is appropriate given the ever increasing exposures to which executives are subject.

My gut reaction to John and Paul's post—as a new member of the policyholder-side of our industry, only a few short months removed from my tenure with AIG—was shock that after a year of imposing doubt-digit percentage premium increases on their clientele, the insurers now want to reduce coverage as well?! The underwriting double-whammy! After all, in what other industry are customers expected to pay more in order to get less?

At first glance it may seem like John and Paul are suggesting a radical across-the-board stripping down of D&O coverage to its bare bones, securities claim coverage only with 20^th Century terms and conditions. They correctly point out that during the soft market of the past decade or more, premiums were reduced significantly while terms and conditions were liberalized by all competitive insurers seeking to maintain or grow market share. In the spirit of full disclosure, as an attorney with AIG Financial Lines from 2005 to last summer, the last few years of which were spent leading legal support of its management liability division, I wrote much of the policy language that John and Paul are now disparaging.

However, after taking many deep breaths, I realized that what John and Paul have proposed is not all that revolutionary. What John and Paul propose here is what should have gone on throughout the soft market, what should go on every day in our industry, and what is needed increasingly these days… that is, thoughtful and responsible underwriting. Indeed, every policy placement is subject to negotiation of not only price, but also terms and conditions delineating the scope of coverage and how the policy will function. In these contract negotiations, different insurers come to the table with different underwriting philosophies and limitations, and different brokers prioritize different policy features and language over others on behalf of their clients.

Not all policy provisions are viewed similarly by everyone in the industry. Indeed, there are a couple of items cited as overbroad by John and Paul's survey respondents that AIG rarely, if ever, provides on its policies, while other markets provide the same wording almost automatically upon request. Conversely, there are items on John and Paul's list that AIG readily provides, but that other insurers are adamantly against providing. My experience with AIG was that you would be hard pressed to find two primary D&O policies, even though negotiated with the same broker, that are identical. The differences between policies only become more pronounced as the insureds grow in size and complexity, necessitating more customized coverage. The soft market did not change this dynamic, though it certainly pushed the negotiations further in a pro-insured direction.

While I concur with all of Kevin's and Paul Ferrillo's responses to John and Paul's list of concerns, Woodruff Sawyer and I will save our commentary for our private negotiations and will express our views on each topic in discussions with our clients and trading partners. It is worth re-emphasizing, however, two important themes in Kevin's response: (1) Efforts to clarify underwriting intent and right-size it to a given risk will generally be supported by the broker community, but (2) efforts to weaken the protection now provided to directors and officers will not. Brokers have worked hard to make sure their clients have the best protection available for the best price, particularly in light of the ever-evolving, difficult litigation environment that confronts directors and officers. That won't change. Any attempts by carriers to reduce coverage should certainly be accompanied by a corresponding and identifiable reduction in premium.

This begs the question of how these terms and conditions will be valued by insurers, brokers and insureds. As stated above, not all policy provisions are viewed similarly by all in the industry. Placing a monetary value on discreet expansions of coverage is one thing, as insurers are able to determine how much they've paid out in loss due to sexual harassment settlements or derivative investigations. However, trying to place a value on the more nuanced elements of contract terms and conditions is very difficult, if not nearly impossible. Did any insurer actually calculate how much additional loss they would have to pay out by adding "final non-appealable adjudication" trigger wording to the conduct exclusions? I think not. So how will they put a number on it now? Much like those proposed changes that impact the scope of coverage, the value of those that affect how the policy functions is dependent on the significance placed on the subject wording by the insured, in consultation with their broker, as well as the insurer.

A one-size fits all approach has never been appropriate in underwriting or procuring coverage as complicated as directors & officers liability insurance, and the current market is no different. If anything, the challenges of the current market require even more fine-tuning of coverage and expertise in discerning what coverage is needed for a given insured, what coverage is helpful, what coverage is nice to have, and what coverage is of limited value or simply unnecessary. It is times like these where the expertise provided by all in the industry is paramount and distinguishes the best from the rest.

While not providing John and Paul with a point by point response to their list of proposed policy changes, I would like to leave them with this to consider over the coming year of negotiations:

Dear John and Paul,

You say you want a D&O revolution
Well, you know
We all want to change the terms.
You tell me that it's D&O evolution
Well, you know
We all want to change the terms.

But when you talk about destruction of coverage
Don't you know that you can count me out.
Don't you know it's gonna be
A fight, a fight, a fight!

You say you got a real solution
Well, you know
We'd all love to see a draft.
You ask me for a contribution of additional premium
Well, you know
We're all doing what we can for our clients.

But if you want more money for people with minds that only rate
All I can tell is brother you have to wait.
Don't you know it's gonna be
A fight, a fight, a fight!

You say you'll change the application
Well, you know
We all want to change your underwriting intent.
You tell me it's the competition
Well, you know
You better free your mind instead.

But if you go carrying pictures of Dennis Kozlowski
You ain't going to make it with anyone anyhow.
Don't you know it's gonna be
A fight, a fight, a fight!

A fight, a fight, a fight!

A fight, a fight, a fight!

A fight, a fight, a fight!